Yen to Strengthen to 75 on Limited BOJ Boost: Strategist

The Japanese yen, which hit a nine-month low this week, is set to record its sharpest fall in two years on Wednesday, but one currency strategist believes this weakening trend is going to reverse, forecasting dollar-yen to strengthen to 75 over the next three months.

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“The yen has overshot where it should be on anticipation that the Bank of Japan will launch a major campaign to boost inflation, but we don’t think this will occur,” Bilal Hafeez, MD & Global Head of FX Research at Deutsche Bank told CNBC.

“We have had unusual events over the past four weeks, which all caused the yen to weaken…But I think all these factors are going to prove to be temporary,” he added. The yen has fallen 5 percent against the U.S. dollar since the beginning of February.

Earlier this month, the Bank of Japan unexpectedly expanded its asset purchase program by 10 trillion yen as part of efforts to weaken the yen and beat deflation. However, Hafeez believes this is the “most aggressive” action investors are likely to see from the BOJ this year.

Hafeez says the Japanese currency is unlikely to weaken for a prolonged period until the U. S. Federal Reserve raises interest rates, which would lead investors back into the alternative safe haven currency — the U.S. dollar.

“In the end what really drives yen weaker is when you have higher U.S. interest rates, and in the absence of that, it would be tough for dollar-yen to strengthen too much.”

Outlook for Risk Currencies

Discussing his outlook for commodity currencies such as the Australian and Canadian dollar, which are viewed as a proxy for global growth, Hafeez says they are unlikely to see much upside due to the overhang of high oil prices.

“The issue with commodity currencies is that the rise in oil starts impacting global growth expectations so it limits the extent of strength you can see in some of these currencies,” he said.

Ray Attrill, Head of Forex Strategy, North America, BNP Paribas adds that the rise in oil prices is a “two edged sword” for commodity currencies.

“If we see another $5-$10 up on Brent crude prices, we think that will crimp growth and that’s why the currency market is already looking through the direct benefits of high commodity prices,” Attrill said.

He adds that while he is still very bullish on commodity currencies, “a little pause for consolidation is in order here.”

This year, the Australian dollar has risen 6 percent against the U.S. dollar, while the Canadian dollar has fallen almost 3 percent.